The Legal Environment Of Business: A Critical Thinking Approach
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Chapter 16
Law and Business Associations-I
Introduction
Chapter Sixteen addresses these questions:
• What factors influence a business manager’s choice of organizational form?
• What are some of the common forms of business organization in the United States?
• What are the specialized forms of business associations?
• What are some of the global dimensions of business associations?
Achieving Teaching Excellence
Generating Classroom Controversy
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Browne and Keeley-Vasudeva offer an important reminder. Bringing controversies into the
classroom is not enough. Instructors must encourage students to engage in critical thinking, not
just memorize and repeat alternative perspectives. They ask instructors to use controversy to
encourage students to elevate their goals above the sponge model of education. “Critical thinking
is the antithesis of the sponge model.”
Charles S. Green, III and Hadley G. Klug describe an assignment that is consistent with the
advice offered by Browne and Keeley-Vasudeva. Green and Klug, sociology professors, describe
Teaching Excellence
References
• M. Neil Browne & Mary L. Keeley-Vasudeva, “Classroom Controversy as an Antidote for
the Sponge Model of Learning,” COLLEGE STUDENT JOURNAL 368 (September
1992).
Chapter Overview, Topic Outline, and Discussion Questions
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Chapter Overview
Chapter Sixteen outlines some of the common forms of business associations, including
simple proprietorships, partnerships, and specialized associations (joint stock, joint venture, and
franchises). Additionally, global dimensions of some of these business associations will be
examined here.
Topic Outline
I. Factors Influencing a Business Manager’s Choice of Organizational Form
II. Some Common Forms of Business Organization in the United States
A. Sole Proprietorships
B. General Partnerships
1. Creating a Partnership
a. In re KeyTronics
2. Relationship between Partners
3. Terminating a Partnership
C. Limited Partnerships and Limited Liability Limited Partnerships
1. Limited Liability Limited Partnerships
III. Specialized Forms of Business Associations
1. Laws Governing Franchising
2. Internet Franchising
IV. Global Dimensions of Business Associations
A. Outsourcing
V. Summary
Discussion Questions for Chapter Sixteen
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1. Explain relationships between sole proprietorships and partnerships.
Several relationships between the two exist. One relationship between the two is that the
2. Explain why someone might think this statement is true: The law protects people who do not
have written partnership agreements.
3. Evaluate: The partnership form is best if people are concerned about tax liability.
This statement is flawed because the partnership form is not always the best if people are
concerned about tax liability. Taxes on partnership profits must be paid by the partners even
4. Explain why someone might think this statement is true: The concept of indemnification is
important.
5. Why are people more careful in regulating limited partnerships than other forms of
partnerships?
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6. Evaluate this statement: Once a business has chosen a particular form, it should stick with its
choice indefinitely.
7. Explain relationships between cooperatives and franchises.
A cooperative is a not-for-profit organization formed by individuals to market products. A
franchise is a relationship based on a private agreement between a franchiser who owns a
Answers to Critical Thinking about the Law Questions, Case Summaries,
Answers to Review Questions, Review Problems, and Case Problems
Suggested Answers to Critical Thinking about the Law Questions
1. One general comment is that people expect more personal service from a sole proprietor or a
partner in a partnership than they do from a major corporation. Students could say that they
2. Joan appreciates freedom. She wants to act without restriction from rules imposed by others.
3. A person who wants a sole proprietorship probably wants freedom. Vanessa wants to be her
Case Summary—Quality Car & Truck Leasing, Inc. v. Sark
Michael Sark operated a logging business as a sole proprietorship. To acquire equipment for
The Legal Environment Of Business: A Critical Thinking Approach
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the business, Sark and his wife, Paula, borrowed funds from Quality Car & Truck Leasing, Inc.
When his business encountered financial difficulties, Sark became unable to pay his creditors,
including Quality. The Sarks sold their house (valued at $203,500) to their son, Michael, Jr. for
Case Summary—In re KeyTronics
This case focuses on testing partnership existence. Willson and King worked together to
create a key dispenser-revalue station for carwashes and to set up a business called “Secure Data
Systems” but the business ideas were never carried through. No written agreement was signed by
Case Summary—Enea v. Superior Court of Monterey County
The Daniels family created a partnership called 3-D, with the sole asset being an office
building. The building housed the law office of William Daniels and was also leased to Claudia
Daniels. There was no stipulation that the spaced had to be rented at fair market price. Enea, a
Suggested Answers to Critical Thinking about the Law Questions
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1. The court is saying that the defendants would have had to specifically state that the purpose
2. There are certain duties dictated by law that a partnership must follow. For the most part,
Case Summary—Holiday Inn Franchising, Inc. v. Hotel Associates, Inc.
This case involves “good faith” construction projects that were undertaken without written
contracts. For decades, Buddy House collaborated on such projects with Holiday Inn
Franchising, Inc. At Holiday Inn’s request, House inspected a hotel in Texas to estimate the cost
of getting it into shape. Holiday Inn wanted House to renovate the hotel and operate it as a
After 10 years, HAI applied for an extension of the franchise term. Holiday Inn asked for
major renovations, and HAI spent $3 million to comply with the request. Holiday Inn did not
renew HAI’s license; instead, it granted a franchise to another hotel in the area. HAI sold its
Answers to Review Questions
16-1. The primary difference between a sole proprietorship and a general partnership is that a
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16-2. Anyone starting a business has multiple factors to consider when determining what form
of business to choose. For instance, the framework for taxation, the pattern of control of
the organization, who is liable when, ability to transfer rights and responsibilities of
ownership, and the length of time that the firm will be alive and functioning are all
matters that need to be analyzed before going into business because they differ
considerably dependent on which form of business organization is chosen. However, the
principal factors influencing the choice of organizational form include the following
factors:
• Tax ramifications
• Control considerations
16-3. The answer is based on the probability that a partnership is not going to be immediately
profitable. In other words, it will not have any way to use its possible losses as a tax
16-4. One tax advantage of a general partnership is that there is no separate entity (partnership)
tax. Profits are taxed to partners as ordinary income. In contrast, with regard to a public
16-5. Liability for LPs is greater for a general partner than it is for a limited partner, while
16-6. When individuals, partnerships, or corporations make a private agreement to finance,
produce, and sell goods, securities, or commodities for a limited purpose and/or a limited
Answers to Review Problems
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16-7. The Revised Uniform Partnership (RUPA) determines whether a partnership exists based
on three factors: a) whether there exists a sharing of profits and losses; b) a joint
ownership of the business; and c) an equal opportunity to participate in the management
of the business. In terms of Classen’s argument that there is a partnership (so he can hold
16-8. The district court will not likely grant National’s motion for summary judgment. In order
for summary judgement to be granted, there must be no significant question of fact
involved in the case, and the moving party must be entitled to judgment as a matter of
law. Although the franchisor and the franchisee in a franchise relationship are normally
16-9. According to the definition of partnership, which is the association of two or more
16-10. Yes, Dunn will be held liable. He had enough control over the management of the
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16-11. No, Bron and Arthur cannot legally compel David to account for the profits of the
16-12. Charles made a mistake. He could continue or just to wind up the affairs of the
Answers to Case Problems
16-13. The district court held that pursuant to the franchise agreements between McDonald’s
Corporation and J.C., Inc., McDonald’s was entitled to immediate possession of the
16-14. The appellate court agreed with the plaintiff that an equitable partnership accounting
claim may include claims based on breach of fiduciary duty. The court cited Michigan
16-15. The district court found in favor of the plaintiffs, allowing GTO to continue operating its
gas station during the pendency of its litigation against the defendant. In the court’s
opinion, the “balance of the equities” favored GTO. GTO invested over $325,000 in its
The Legal Environment Of Business: A Critical Thinking Approach
16-16. The indications of a partnership include the parties’ intent to enter into a partnership and
the sharing of profits. However, the fact that Design 88 acted on its own and that there
16-17. The Court did rule in Guzman’s favor, finding that the company was liable for fraudulent
misrepresentation. This is because, as part of the franchise agreement, the cleaning
Thinking Critically about Relevant Legal Issues
1. Perhaps as his business partner, Ed has some ethical responsibility to tell Jack about the new
opportunity, but overall Ed is not responsible for telling Jack about the mall development.
2. It does not matter where business discussions originate because until they are acted upon,
3. Ed should be allowed to leave the partnership as long as he goes through the dissolution and
winding-up process. This process will prevent a new business from taking place and will tie